<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 28, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ___________ to ___________
Commission file number 0-9428
ADAC LABORATORIES
(Exact name of registrant as specified in its charter)
California 94-1725806
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
540 Alder Drive
Milpitas, California 95035
-------------------- -----
(Address of principal executive offices) (Zip Code)
(408) 321-9100
--------------
(Registrant's telephone number including area code)
Not Applicable
--------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
As of February 1, 1999, Registrant had outstanding 20,450,067 shares of Common
Stock, no par value
(This document contains a total of 26 pages)
<PAGE>
ADAC LABORATORIES
QUARTERLY REPORT ON FORM 10-Q/A
INDEX
Page
----
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Statements of Operations for the
Three-Month And Nine-Month Periods Ended June 28, 1998
and June 29, 1997 3
Condensed Consolidated Balance Sheets at June 28, 1998
and September 28, 1997 4
Condensed Consolidated Statements of Cash Flows for the
Nine-Month Periods Ended June 28, 1998 and June 29, 1997 5
Notes to Condensed Consolidated Financial Statements 6-14
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15-23
Part II. Other Information
Item 5. Other Information 24
Item 6. Exhibits and Reports on Form 8-K 24
Signatures 25
Exhibit Index 26
2
<PAGE>
PART I - FINANCIAL INFORMATION
ADAC LABORATORIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 28, JUNE 29, JUNE 28, JUNE 29,
1998 1997 1998 1997
(Amounts in thousands, except per share data) (Restated) (Restated) (Restated) (Restated)
- -----------------------------------------------------------------------------------------------------------------------------------
REVENUES, NET:
<S> <C> <C> <C> <C>
Product $ 49,472 $ 47,493 $ 151,292 $ 138,601
Service 20,284 17,763 60,424 51,289
---------------- ---------------- ---------------- ---------------
69,756 65,256 211,716 189,890
---------------- ---------------- ---------------- ---------------
COST OF REVENUES:
Product 25,986 28,234 82,136 82,492
Service 14,402 11,104 40,098 33,460
Discontinued product -- -- 14,494 --
---------------- ---------------- ---------------- ---------------
40,388 39,338 136,728 115,952
---------------- ---------------- ---------------- ---------------
GROSS PROFIT 29,368 25,918 74,988 73,938
---------------- ---------------- ---------------- ---------------
OPERATING EXPENSES:
Marketing and sales 12,289 10,081 35,762 30,655
Research and development 3,669 4,287 12,950 11,186
General and administrative 5,698 4,241 15,758 12,494
Goodwill amortization 588 251 1,625 700
Acquired research and development -- 531 -- 531
Acquisition expense write off -- 651 -- 651
---------------- ---------------- ---------------- ---------------
22,244 20,042 66,095 56,217
---------------- ---------------- ---------------- ---------------
OPERATING INCOME 7,124 5,876 8,893 17,721
---------------- ---------------- ---------------- ---------------
Interest and other expense, net 1,579 1,338 3,507 3,957
---------------- ---------------- ---------------- ---------------
INCOME BEFORE PROVISION
FOR INCOME TAXES 5,545 4,538 5,386 13,764
Provision for income tax 2,163 1,770 2,101 5,368
---------------- ---------------- ---------------- ---------------
NET INCOME $ 3,382 $ 2,768 $ 3,285 $ 8,396
---------------- ---------------- ---------------- ---------------
---------------- ---------------- ---------------- ---------------
NET INCOME PER SHARE
Basic $ .17 $ .15 $ .17 $ .46
---------------- ---------------- ---------------- ---------------
---------------- ---------------- ---------------- ---------------
Diluted $ .17 $ .14 $ .16 $ .43
---------------- ---------------- ---------------- ---------------
---------------- ---------------- ---------------- ---------------
NUMBER OF SHARES USED IN PER SHARE CALCULATION
Basic 19,681 18,602 19,291 18,313
---------------- ---------------- ---------------- ---------------
---------------- ---------------- ---------------- ---------------
Diluted 20,443 19,790 20,184 19,542
---------------- ---------------- ---------------- ---------------
---------------- ---------------- ---------------- ---------------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE>
ADAC LABORATORIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 28, 1998 SEPT. 28,1997
(UNAUDITED)
(Amounts in thousands) (RESTATED) (RESTATED)
---------------------- -------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 9,029 $ 5,088
Accounts receivable, net 52,674 48,572
Inventories, net 71,261 52,672
Prepaid expenses and other current assets 3,812 3,570
---------------------- -------------------
TOTAL CURRENT ASSETS 136,776 109,902
Service parts, net 17,927 16,469
Fixed assets, net 10,190 9,789
Capitalized software, net 10,349 12,265
Intangibles, net 30,851 21,703
Deferred income taxes 22,332 21,702
Other assets, net 2,233 3,269
---------------------- -------------------
TOTAL ASSETS $ 230,658 $ 195,099
---------------------- -------------------
---------------------- -------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable to banks $ 32,659 $ 22,217
Accounts payable 18,847 10,543
Deferred revenues 10,008 15,017
Customer deposits and advance billings 3,562 2,826
Accrued compensation 9,681 7,567
Warranty and installation 6,921 3,713
Other accrued liabilities 7,709 7,222
---------------------- -------------------
TOTAL CURRENT LIABILITIES 89,387 69,105
Deferred income taxes 12,824 13,830
Liabilities and deferred credits 4,400 4,073
---------------------- -------------------
TOTAL LIABILITIES 106,611 87,008
---------------------- -------------------
SHAREHOLDERS' EQUITY:
Preferred stock, no par value:
Authorized: 5,000 shares;
Issued and outstanding: none
Common stock, no par value:
Authorized: 50,000 shares;
Issued and outstanding: 19,913 shares at June 28, 1998 and
18,812 shares at September 28, 1997 141,684 128,109
Accumulated deficit (14,367) (17,652)
Translation adjustment (3,270) (2,366)
---------------------- -------------------
TOTAL SHAREHOLDERS' EQUITY 124,047 108,091
---------------------- -------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 230,658 $ 195,099
---------------------- -------------------
---------------------- -------------------
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
<PAGE>
ADAC LABORATORIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
---------------------------------------------
JUNE 28, 1998 JUNE 29, 1997
(Amounts in thousands) (RESTATED) (RESTATED)
- ------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 3,285 $ 8,396
Adjustments to reconcile net income to net cash
Provided by (used in) operating activities:
Depreciation and amortization 8,751 8,196
Provision for product returns and doubtful accounts 3,827 691
Deferred income taxes (1,871) 6,449
Inventory allowance (1,238) 3,659
One-time charges 14,494 1,182
Changes in assets and liabilities:
Accounts receivable (10,499) 1,076
Inventories (24,508) (6,933)
Prepaid expenses and other current assets (234) 1,610
Service parts (1,999) (2,375)
Accounts payable 7,639 (4,791)
Deferred revenues (2,747) (1,369)
Customer deposits and advance billings 736 (194)
Accrued compensation 2,114 (819)
Other accrued liabilities 1,737 686
- ------------------------------------------------------------------------------------------------------------------------------
Cash provided by (used in) operating activities (513) 15,464
- ------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (3,748) (4,047)
Increase in other assets (4,655) (3,807)
Intangibles (7,273) (10,537)
Acquisition assets, net 807 --
- ------------------------------------------------------------------------------------------------------------------------------
Cash used in investing activities (14,869) (18,391)
- ------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings (repayments) under short term debt arrangements, net 9,451 (3,328)
Dividends paid -- (2,137)
Proceeds from issuance of common stock, net 10,776 12,900
- ------------------------------------------------------------------------------------------------------------------------------
Cash provided by financing activities 20,227 7,435
- ------------------------------------------------------------------------------------------------------------------------------
Effect of exchange rates on cash (904) (1,446)
- ------------------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 3,941 3,062
Cash and cash equivalents, at beginning of the period 5,088 3,081
- ------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, at end of the period $ 9,029 $ 6,143
- ------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Interest paid $ 3,160 $ 2,962
Income taxes paid $ 5,046 $ 2,464
NONCASH INVESTING ACTIVITIES:
Issuance of common stock pursuant to the acquisition of Southern Cats.
See Note 13.
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE>
ADAC LABORATORIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed interim consolidated financial
statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q/A and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for annual
financial statements. In the opinion of management, the condensed
interim consolidated financial statements include all normal recurring
adjustments necessary for a fair presentation of the information
required to be included. Operating results for the three and nine-month
periods ended June 28, 1998 are not necessarily indicative of the
results that may be expected for any future periods, including the full
fiscal year. Reference should also be made to the Annual Consolidated
Financial Statements, Notes thereto, and Management's Discussion and
Analysis of Financial Condition and Results of Operations contained in
the Company's Annual Report on Form 10-K for the fiscal year ended
September 27, 1998.
The previous year-end's balance sheet data was derived from audited
financial statements but does not include all disclosures required by
generally accepted accounting principles.
2 NET INCOME PER SHARE
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 (SFAS 128),
Earnings per Share (EPS). SFAS 128 requires dual presentation of basic
EPS and diluted EPS on the face of all income statements, for all
entities with complex capital structures. Basic EPS is computed as net
income divided by the weighted average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution
that could occur from common shares issuable through stock options,
warrants and other convertible securities. This statement also requires
a reconciliation of the numerator and denominator of the diluted EPS
computation. EPS data for the period ended June 28, 1998 and all prior
periods have been restated to conform with the provisions of this
statement.
The following is a reconciliation of the numerator (net income) and
denominator (number of shares) used in the basic and diluted EPS
calculation:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------------------------------------------------------------
(Dollar amounts in thousands JUNE 28, JUNE 29, JUNE 28, JUNE 29,
except per share data) 1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Basic EPS: Net Income $ 3,382 $ 2,768 $ 3,285 $ 8,396
Denominator: Weighted Average
Common Shares Outstanding 19,681 18,602 19,291 18,313
--------------- ---------------- ---------------- ----------------
Basic EPS $ .17 $ .15 $ .17 $ .46
--------------- ---------------- ---------------- ----------------
--------------- ---------------- ---------------- ----------------
Diluted EPS: Net Income $ 3,382 $ 2,768 $ 3,285 $ 8,396
Denominator: Weighted Average
Common Shares Outstanding 19,681 18,602 19,291 18,313
Options 762 1,188 893 1,229
--------------- ---------------- ---------------- ----------------
Total Shares 20,443 19,790 20,184 19,542
--------------- ---------------- ---------------- ----------------
--------------- ---------------- ---------------- ----------------
Diluted EPS $ .17 $ .14 $ .16 $ .43
--------------- ---------------- ---------------- ----------------
--------------- ---------------- ---------------- ----------------
</TABLE>
3. DEPRECIATION AND AMORTIZATION
Depreciation and amortization was approximately $2.5 million and $3.0
million for the three-month periods ended June 28, 1998 and June 29,
1997, respectively.
6
<PAGE>
ADAC LABORATORIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. INVENTORIES
<TABLE>
<CAPTION>
(Dollar amounts in thousands) JUNE 28, 1998 SEPTEMBER 28, 1997
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Inventories consist of:
Purchased parts and sub-assemblies $ 18,584 $ 15,499
Work in process 4,217 3,435
Finished goods 52,437 38,594
--------------------------------------------------------------------------------------------------------------------------
75,238 57,528
Less reserves (3,977) (4,856)
--------------------------------------------------------------------------------------------------------------------------
$ 71,261 $ 52,672
--------------------------------------------------------------------------------------------------------------------------
</TABLE>
5. SERVICE PARTS
<TABLE>
<CAPTION>
(Dollar amounts in thousands) JUNE 28, 1998 SEPTEMBER 28, 1997
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Service parts consist of:
Field service parts, at cost $ 25,923 $ 23,844
Less accumulated depreciation (7,996) (7,375)
-------------------------------------------------------------------------------------------------------------------------
$ 17,927 $ 16,469
--------------------------------------------------------------------------------------------------------------------------
</TABLE>
6. FIXED ASSETS
<TABLE>
<CAPTION>
(Dollar amounts in thousands) JUNE 28, 1998 SEPTEMBER 28, 1997
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Fixed assets, at cost, consist of:
Production and test equipment $ 3,939 $ 9,144
Field service equipment 1,067 2,443
Office and demonstration equipment 13,931 15,166
Leasehold improvements 1,043 1,181
--------------------------------------------------------------------------------------------------------------------------
19,980 27,934
Less accumulated depreciation and
amortization (9,790) (18,145)
--------------------------------------------------------------------------------------------------------------------------
$ 10,190 $ 9,789
--------------------------------------------------------------------------------------------------------------------------
</TABLE>
7. INTANGIBLES
<TABLE>
<CAPTION>
(Dollar amounts in thousands) JUNE 28, 1998 SEPTEMBER 28, 1997
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Intangibles consist of:
Goodwill $ 26,684 $ 15,140
Acquired technology 8,984 8,984
Other 510 510
--------------------------------------------------------------------------------------------------------------------------
36,178 24,634
Less accumulated amortization (5,327) (2,931)
--------------------------------------------------------------------------------------------------------------------------
$ 30,851 $ 21,703
--------------------------------------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE>
ADAC LABORATORIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(UNAUDITED)
8. OTHER ACCRUED LIABILITIES
<TABLE>
<CAPTION>
(Dollar amounts in thousands) JUNE 28, 1998 SEPTEMBER 28, 1997
--------------------------------------------------------------------------------------------------------------------------
Other accrued liabilities consist of:
<S> <C> <C>
Accrued cost of revenue $ 1,379 $ 367
Accrued royalties 935 790
Other accrued expenses 5,395 6,065
--------------------------------------------------------------------------------------------------------------------------
$ 7,709 $ 7,222
--------------------------------------------------------------------------------------------------------------------------
</TABLE>
9. NON-ORDINARY CHARGES
On February 10, 1998, the Company decided to discontinue the HCIS
business unit's LabStat product while retaining the laboratory support
and maintenance business. The decision was made after the Company's
Board of Directors determined that continuing development and marketing
of LabStat was not in the best interest of the Company and its
shareholders and that all meaningful discussions with possible
strategic partners had ceased. This decision has allowed the Company to
increase its focus on the radiology business resulting in greater
profitability for both HCIS and ADAC as a whole.
The Company's decision to discontinue LabStat resulted in a
non-ordinary discontinued product charge of $11.6 million. The charge
was a consequence of the Company determining that certain assets
utilized in the development and marketing of LabStat became impaired as
a result of the Company's decision. The discontinued business charge
consisted principally of non-cash charges, including the write off of
$4.9 million of capitalized software, $4.7 million of deferred product
costs, $0.9 million of fixed assets that were specifically utilized in
the LabStat product, $1.0 million in legal and other expenses that were
accrued as part of the write-off and $0.1 million in receivables.
In connection with the Company's evaluation of its laboratory
information systems business, the Company also conducted an analysis of
the recoverability of certain assets utilized in the Company's Digital
Subtraction Angiography (DSA) business and determined it was
appropriate to write off certain of these assets. Accordingly, the
Company included an impairment charge of $2.9 million in its results of
operations for the first quarter of fiscal 1998 related to these
assets. The decision to write off the DSA assets, consisting primarily
of inventory, was a result of the Company's decision to no longer
market the product due to steadily declining revenues. The combined
non-ordinary write off for LabStat and DSA was $14.5 million.
In connection with its acquisition of Cortet, Inc. (Cortet) in May
1997, the Company recognized a one-time, pre-tax charge to operations in
the third quarter of fiscal 1997 of $0.5 million for charges related to
the purchase of acquired in-process research development.
In conjunction with the acquisition of Cortet in June 1997, the Company
identified certain assets, consisting of capitalized consulting and
banking expenses relating to other specific acquisitions, and determined
it was appropriate to write off these assets since the acquisitions would
not occur. As a result, the Company included a charge for $0.7 million
in its results of operations for the third quarter of fiscal 1997 for
these assets.
10. INCOME TAXES
The Company uses the deferral method to account for income taxes.
Valuation allowances are established when necessary to reduce deferred
tax assets to the amounts expected to be realized.
The provision (benefit) for income taxes for each of the three-month
and six-month periods ended June 28, 1998 and June 29, 1997 are based on
the estimated effective income tax rates for the fiscal years ending
September 27, 1998 and September 28, 1997 of 39.0%.
8
<PAGE>
ADAC LABORATORIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(UNAUDITED)
11. CREDIT AND BORROWING ARRANGEMENTS
The Company has a $60 million revolving credit facility with a bank
syndicate. The credit facility offers borrowings in either U.S. dollars
or in foreign currencies and expires July 30, 1999. The Company pays
interest and commitment fees on its borrowings based on its debt level
in relation to its cash flow. Commitment fees range from 0.25% to 0.475%
of unused commitment and interest rates are based on the bank's prime
rate or Libor plus rates ranging from 0.875% to 1.5%. Borrowings are
generally repaid within 90 days. At June 28, 1998, the Company had
$27.3 million available for borrowing under this facility.
12. LITIGATION
Commencing in December 1998, a total of eleven class action lawsuits
were filed in federal court by or on behalf of stockholders who
purchased Company stock between January 10, 1996 and December 28, 1998.
These actions name as defendants the Company and certain of its present
officers and directors. The complaints allege various violations of the
federal securities laws in connection with restatement of the Company's
financial statements and seek unspecified but potentially significant
damages. The Company intends to contest these actions vigorously. A
stockholder derivative action, purportedly on behalf of the Company and
naming as defendants Company officers and directors was also filed in
state court seeking recovery for the Company based on stock sales by
these defendants during the above time period. The Company is also a
defendant in various legal proceedings incidental to its business.
While it is not possible to determine the ultimate outcome of these
actions at this time, management is of the opinion that any unaccrued
liability resulting from these claims would not have a material adverse
effect on the Company's consolidated financial position, results of
operations or cash flow.
13. ACQUISITIONS
In January 1998, the Company acquired CT Solutions, Inc. (CT Solutions)
and O.N.E.S. Medical Services, Inc.(ONES) for cash. CT Solutions was an
independent provider of computed tomography refurbished equipment and
service. ONES was a provider of nuclear medicine service and refurbished
equipment. The acquisitions were accounted for using the purchase method
of accounting. CT Solutions and ONES are not material to the financial
position or results of operations of the Company.
In October 1997, the Company acquired substantially all of the assets of
Southern Cats, Inc. and its affiliates (Southern Cats) in exchange for
139,131 shares of the Company's common stock valued at $2.8 million.
Southern Cats was an independent provider of computed tomography and
X-ray equipment refurbishment and service. The acquisition was accounted
for using the purchase method of accounting. Southern Cats is not
material to the financial position or results of operations of the
Company.
9
<PAGE>
ADAC LABORATORIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(UNAUDITED)
14. RESTATEMENT OF FINANCIAL STATEMENTS
Subsequent to the Company's announcement on November 5, 1998 of the
results of operations for its fourth fiscal quarter and fiscal year
ending September 27, 1998, the Company commenced a review of its
accounting principles and their historic application. On December 29,
1998, the Company announced that its financial results for fiscal years
1996, 1997 and the first three quarters of fiscal 1998 would be
restated and that its previously announced results for the fourth
fiscal quarter would change.
The Company completed an extensive and critical review of revenue
recorded for each year of fiscal 1996 through 1998. In deciding when
revenue would be recognized, the Company applied a more stringent revenue
recognition policy than it had in the past. The items recognized and
restated were primarily certain sales transactions by the Company's
Medical Systems business unit where products sold had been shipped to a
destination other than their final installation location. The primary
impact of the revenue restatement was to move revenue and associated
costs forward to future periods, including fiscal 1999. Costs, expenses
and return reserves associated with the restated revenues were also
adjusted.
The Company adjusted a number of non-ordinary charges taken during the
restated periods. The adjustments included a reduction in the acquired
in-process research and development charge taken in the third quarter of
fiscal 1997 to reflect recent SEC interpretations. The Company also
reduced the non-ordinary international restructuring charge taken in the
fourth quarter of fiscal 1998 and moved it forward to fiscal 1999 due to
a delay in implementing certain aspects of the plan. In addition, the
Company adopted completed contract accounting for the LabStat product,
which resulted in the Company's reversing approximately $6 million of
revenues (together with associated costs) previously recognized in fiscal
1996 and 1997, and correspondingly reducing the non-ordinary charge for
the discontinuation of the LabStat product previously taken in the first
quarter of fiscal 1998.
The Company also undertook a review of its asset carrying values,
accruals and expenses, financial instruments and financial statements
in each restated period and made certain adjustments to these items
throughout those periods. The Company also restated the Geometrics
acquisition from pooling accounting to purchase accounting.
10
<PAGE>
ADAC LABORATORIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(UNAUDITED)
A summary of the effects of the restatement follows:
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------------------
JUNE 28, 1998 JUNE 29, 1997
------------------------------------------------------------------
As As
Originally Originally
(Amounts in thousands, except per share data) Restated Reported Restated Reported
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES, NET:
Product $49,472 $62,521 $47,493 $53,657
Service 20,284 21,000 17,763 17,853
- ----------------------------------------------------------------------------------------------------------------------------
69,756 83,521 65,256 71,510
- ----------------------------------------------------------------------------------------------------------------------------
COST OF REVENUES:
Product 25,986 32,923 28,234 30,799
Service 14,402 14,352 11,104 11,042
- ----------------------------------------------------------------------------------------------------------------------------
40,338 47,275 39,338 41,841
- ----------------------------------------------------------------------------------------------------------------------------
Gross profit 29,368 36,246 25,918 29,669
- ----------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Marketing and sales 12,289 12,671 10,081 10,313
Research and development 3,669 3,789 4,287 4,018
General and administrative 5,698 5,455 4,241 4,514
Goodwill amortization 588 471 251 198
Acquired research and development -- -- 531 5,862
Acquisition expense write off -- -- 651 --
- ----------------------------------------------------------------------------------------------------------------------------
22,244 22,386 20,042 24,905
- ----------------------------------------------------------------------------------------------------------------------------
Operating income 7,124 13,860 5,876 4,764
- ----------------------------------------------------------------------------------------------------------------------------
OTHER EXPENSE:
Interest and other, net 1,579 1,565 1,338 1,336
- ----------------------------------------------------------------------------------------------------------------------------
Income before provision for income taxes 5,545 12,295 4,538 3,428
Provision for income taxes 2,162 4,795 1,770 3,322
- ----------------------------------------------------------------------------------------------------------------------------
Net income $3,383 $7,500 $2,768 $106
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
Net income per share
Basic $.17 $.38 $.15 $.01
Diluted $.17 $.37 $.14 $.01
Number of shares used in per share calculations
Basic 19,681 19,729 18,602 18,587
Diluted 20,443 20,534 19,790 19,775
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE>
ADAC LABORATORIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(UNAUDITED)
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------------------
JUNE 28, 1998 JUNE 29, 1997
------------------------------------------------------------------
As As
Originally Originally
(Amounts in thousands, except per share data) Restated Reported Restated Reported
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES, NET:
Product $151,292 $174,958 $138,601 $158,183
Service 60,424 61,464 51,289 51,668
- ----------------------------------------------------------------------------------------------------------------------------
211,716 236,422 189,890 209,851
- ----------------------------------------------------------------------------------------------------------------------------
COST OF REVENUES:
Product 82,136 95,308 82,492 91,061
Service 40,098 40,016 33,460 32,606
Discontinued product 14,494 3,500 -- --
136,728 138,824 115,952 123,667
- ----------------------------------------------------------------------------------------------------------------------------
Gross profit 74,988 97,598 73,938 86,184
- ----------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Marketing and sales 35,762 35,821 30,655 31,834
Research and development 12,950 11,854 11,186 10,815
General and administrative 15,758 14,570 12,494 13,184
Goodwill amortization 1,625 1,274 700 594
Acquired research and development -- -- 531 5,862
Acquisition expense write off -- -- 651 --
Discontinued products -- 12,900 -- --
- ----------------------------------------------------------------------------------------------------------------------------
66,095 76,419 56,217 62,289
- ----------------------------------------------------------------------------------------------------------------------------
Operating income 8,893 21,179 17,721 23,895
- ----------------------------------------------------------------------------------------------------------------------------
OTHER EXPENSE:
Interest and other, net 3,507 3,465 3,957 3,756
- ----------------------------------------------------------------------------------------------------------------------------
Income before provision for income taxes 5,386 17,714 13,764 20,139
Provision for income taxes 2,101 6,908 5,368 9,388
- ----------------------------------------------------------------------------------------------------------------------------
Net income $3,285 $10,806 $8,396 $10,751
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
Net income per share
Basic $.17 $.56 $.46 $.59
Diluted $.16 $.54 $.43 $.55
Number of shares used in per share calculations
Basic 19,291 19,298 18,313 18,306
Diluted 20,184 20,190 19,542 19,470
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE>
ADAC LABORATORIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(UNAUDITED)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 28, 1998 SEPTEMBER 28, 1997
--------------------------------------------------
As As
Originally Originally
(Amounts in thousands) Restated Reported Restated Reported
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $9,029 $9,029 $5,088 $5,088
Accounts receivable, net 52,674 126,654 48,572 99,495
Inventories, net 71,261 37,631 52,672 27,534
Prepaid expenses and other current assets 3,812 6,624 3,570 10,155
--------------------------------------------------
TOTAL CURRENT ASSETS 136,776 179,938 109,902 142,272
Service parts, net 17,927 18,823 16,469 17,278
Fixed assets, net 10,190 11,312 9,789 11,555
Capitalized software, net 10,349 12,441 12,265 14,007
Intangibles, net 30,851 20,671 21,703 10,110
Deferred income taxes 22,332 8,879 21,702 8,249
Other assets, net 2,233 2,692 3,269 3,524
--------------------------------------------------
TOTAL ASSETS $230,658 $254,756 $195,099 $206,995
--------------------------------------------------
--------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable to banks $32,659 $32,659 $22,217 $22,217
Accounts payable 18,847 18,847 10,543 10,543
Deferred revenues 10,008 8,398 15,017 11,561
Customer deposits and advance billings 3,562 3,775 2,826 2,841
Accrued compensation 9,681 9,053 7,567 7,522
Warranty and installation 6,921 7,516 3,713 4,495
Other accrued liabilities 7,709 10,998 7,222 6,620
--------------------------------------------------
TOTAL CURRENT LIABILITIES 89,387 91,246 691,045 65,799
Deferred income taxes 12,824 10,097 13,830 11,103
Liabilities and deferred credits 4,400 3,790 4,073 3,596
--------------------------------------------------
TOTAL LIABILITIES 106,611 105,133 87,008 80,498
--------------------------------------------------
SHAREHOLDERS' EQUITY:
Preferred stock, no par value:
Authorized: 5,000 shares;
Issued and outstanding: none
Common stock, no par value:
Authorized: 50,000 shares;
Issued and outstanding: 19,913 shares at
June 28, 1998 and 18,812 shares at
September 28, 1997 141,684 136,495 128,109 123,269
Retained earnings/accumulated deficit (14,367) 16,398 (17,652) 5,593
Translation adjustment (3,270) (3,270) (2,366) (2,365)
--------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 124,047 149,623 108,091 126,497
--------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $230,658 $254,756 $195,099 $206,995
--------------------------------------------------
--------------------------------------------------
</TABLE>
13
<PAGE>
ADAC LABORATORIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(UNAUDITED)
15. RECENT PRONOUNCEMENTS
In June 1997, Financial Accounting Standard 130, "Reporting
Comprehensive Income" ("FAS 130"), was issued and is effective for
fiscal years commencing after December 15, 1997. The Company will
comply with the requirements of FAS 130 in fiscal year 1999. The
Company is evaluating alternative formats for presenting this
information, but does not expect this pronouncement to materially impact
the Company's results of operations.
In June 1997, Financial Accounting Standard 131, "Disclosures About
Segments of an Enterprise and Related Information" ("FAS 131"), was
issued and is effective for fiscal years commencing after December 15,
1997. The Company will comply with the requirements of FAS 131 in
fiscal year 1999. The Company is evaluating alternative formats for
presenting this information.
In October 1997, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position ("SOP 97-2"), "Software Revenue
Recognition". This SOP supersedes "SOP 91-1", Software Revenue
Recognition. The Company will comply with the requirements of
"SOP 97-2" in fiscal year 1999. The Company is currently assessing the
implications of this new statement and the impact of its implementation
on the Company's consolidated financial statements.
14
<PAGE>
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Company's Condensed Consolidated Financial Statements and related Notes
thereto contained elsewhere within this document. Operating results for the
three-month and nine-month periods ended June 28, 1998 are not necessarily
indicative of the results that may be expected for any future periods,
including the full fiscal year. Reference should also be made to the Annual
Consolidated Financial Statements, Notes thereto, and Management's Discussion
and Analysis of Financial Condition and Results of Operations contained in
the Company's Annual Report on Form 10-K for the fiscal year ended September
27, 1998.
RESULTS OF OPERATIONS
THE THREE-MONTH AND NINE-MONTH PERIODS ENDED JUNE 28, 1998 COMPARED TO THE
THREE-MONTH AND NINE-MONTH PERIODS ENDED JUNE 29, 1997
Prior to fiscal 1998, the results of the Company's RTP division were included
as part of Medical Systems for the purposes of Management's Discussion and
Analysis. However, due to RTP's continued growth, its results are now
presented with the Company's other software business, HCIS. All historical
data and comparisons have been restated to reflect this change.
Revenues for the third quarter of fiscal 1998 were $69.8 million, a 7%
increase, or $4.5 million, over the third quarter fiscal 1997 revenues of
$65.3 million. Revenues are primarily generated from the sale and servicing
of medical imaging products. Medical Systems revenues represented 72% and
79% of the Company's total revenues for the third quarter of fiscal 1998 and
1997, respectively. Revenues from the Company's Software Business
represented approximately 28% and 21% of the Company's total revenues for the
third quarter of fiscal 1998 and 1997, respectively.
Nine month year-to-date revenues were $211.7 million, an 11% increase, or
$21.8 million, over the $189.9 million for the same period in fiscal 1997.
Excluding the discontinued product charge associated with the write-off of
the LabStat and DSA assets in the first quarter of fiscal 1998, gross profit
for the first nine months of fiscal 1998 was $89.5 million, a 21% increase
over the $73.9 million generated in the same period in fiscal 1997.
Including this charge, gross profit was $75.0 million for the first nine
months of fiscal 1998. See Note 9 of Notes to Condensed Consolidated
Financial Statements.
15
<PAGE>
MEDICAL SYSTEMS
Medical Systems includes revenues from the sale of the Company's nuclear
medicine, ADAC Medical Technologies (AMT) and ADAC Radiology Solutions (ARS)
products, as well as customer service related to those products. AMT is
engaged in the refurbishment and sale of nuclear medicine equipment. ARS is
engaged primarily in the refurbishment, sale and service of third-party
computed tomography (CT) equipment. Summary information related to Medical
Systems' product and service revenues and gross profit margins for the
three-month and nine-month periods ended June 28, 1998 compared to the
corresponding periods in fiscal 1997, are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
-----------------------------------------------------------------------------------
JUNE 28, JUNE 29, JUNE 28, JUNE 29,
(Dollar amounts in thousands) 1998 1997 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Product $34,132 $37,743 $113,555 $117,165
Service 16,240 13,938 48,087 39,492
------- ------- -------- --------
Total Revenues $50,372 $51,681 $161,642 $156,657
------- ------- -------- --------
------- ------- -------- --------
Product revenue geographical mix:
North America 86.0% 79.2% 82.4% 79.1%
Europe 11.0% 12.8% 11.8% 12.9%
Latin America, Japan and Asia 3.0% 8.0% 5.8% 8.0%
Gross margin before discontinued
product charge:
Product 43.2% 39.0% 42.6% 39.1%
Service 24.1% 35.2% 29.9% 30.8%
------- ------- -------- --------
Total Gross Margin 37.0% 38.0% 38.9% 37.0%
------- ------- -------- --------
------- ------- -------- --------
Gross margin after discontinued
product charge:
Product 43.2% 39.0% 40.1% 39.1%
Service 24.1% 35.2% 29.9% 30.8%
------- ------- -------- --------
Total Gross Margin 37.0% 38.0% 37.0% 37.0%
------- ------- -------- --------
------- ------- -------- --------
</TABLE>
Medical Systems' product revenues for the three and nine-month periods ended
June 28, 1998 decreased 10% and 3%, respectively, over the same periods in
fiscal 1997. This decline in sales for the three and nine-month periods ended
June 28, 1998 compared to the corresponding periods in fiscal 1997, was due to
weaker Asian and Latin American Nuclear Medical sales, partially offset by sales
of refurbished CT equipment through the Company's newest business initiative,
ARS
Excluding the effects of the discontinued product charge associated with the
write-off of the DSA assets in the first quarter of fiscal 1998, gross profit
margins for Medical Systems products increased to 42.6% in the first nine
months of fiscal 1998. Including this charge, gross profit margins were 40.1%
for this period. This compares with gross profit margins of 39.1% for the
first nine months of fiscal 1997. See Note 9 of Notes to Condensed
Consolidated Financial Statements. Margins before the discontinued product
charge increased primarily due to sales of MCD, which have higher gross
margins, and were partially offset by the lower margins associated with the
ARS product sales.
Medical Systems service revenues for the three and nine-month periods ended
June 28, 1998 increased 17% and 22%, respectively, over the same periods in
fiscal 1997. These increases resulted from a higher number of customers
under service contracts and, to a lesser extent, from the Company's entry
into the ARS business in the first half of fiscal 1998 through acquisition.
See Note 13 of Notes to Condensed Consolidated Financial Statements. Service
margins decreased for the three and nine-month periods ended June 28, 1998,
when compared to the same periods in fiscal 1997, due to increased staffing,
higher retro-fit costs and lower margins associated with ARS product sales.
16
<PAGE>
SOFTWARE BUSINESS
ADAC's Software Business includes Radiation Therapy Planning (RTP) and
Healthcare Information Systems (HCIS). RTP revenues are generated primarily from
the sale and support of the Company's Pinnacle3-TM- radiation therapy planning
system. HCIS historically generated revenues from the sale of laboratory,
radiology and cardiology information systems as well as from the provision of
support for these products. In the first quarter of fiscal 1998, the Company
took a one-time charge of $11.6 million to discontinue development and marketing
of LabStat-TM-. See Note 9 of Notes to Condensed Consolidated Financial
Statements. As a result, HCIS' current revenues are derived from the sale and
support of radiology and cardiology information systems. Summary information
related to the Software Business' product and support revenues and gross profit
margins for the three and nine-month periods ended June 28, 1998 compared to the
corresponding periods in fiscal 1997, are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
JUNE 28, JUNE 29, JUNE 28, JUNE 29,
(Dollar amounts in thousands) 1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Product $15,340 $9,725 $37,737 $21,165
Support 4,044 3,825 12,337 11,797
-------- ------- ------- -------
Total Revenues $19,384 $13,550 $50,074 $32,962
-------- ------- ------- -------
-------- ------- ------- -------
Product revenue geographical mix:
North America 89.7% 88.6% 91.1% 91.7%
Europe 6.5% 10.0% 6.9% 6.6%
Latin America, Japan and Asia 3.8% 1.4% 2.0% 1.7%
Gross margin before discontinued
product charge:
Product 57.0% 46.5% 55.0% 47.5%
Service 48.7% 45.8% 48.1% 47.9%
----- ----- ----- -----
Total Gross Margin 55.3% 46.3% 53.3% 47.6%
----- ----- ----- -----
----- ----- ----- -----
Gross margin after discontinued
product charge:
Product 57.0% 46.5% 24.3% 47.5%
Service 48.7% 45.8% 48.1% 47.9%
----- ----- ----- -----
Total Gross Margin 55.3% 46.3% 30.2% 47.6%
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
Product revenues for the three and nine-month periods ended June 28, 1998
increased 58% and 78% respectively, over the same periods in fiscal 1997, due
mainly to an increase in sales of Pinnacle3-TM- and the radiology information
system, QuadRIS-TM-. The growth of Pinnacle3-TM- and QuadRIS-TM- reflects
greater penetration of the commercial sector by both these products, and, in
the case of QuadRIS-TM-, continued growth in government sales under the
Company's digital imaging network - picture archiving communications systems
(DIN-PACS) contract with the United States Department of Defense. Excluding
the effects of the discontinued product charge associated with the write-off
of the LabStat-TM- assets, gross profit margins for the Software Business
products increased to 55.0% in the nine-month periods ended June 28, 1998.
See Note 9 of Notes to Condensed Consolidated Financial Statements.
Including this charge gross profit margins were 24.3% for this same period.
Margins before the discontinued product charge increased primarily due to the
higher margins associated with sales of Pinnacle3-TM-.
The Software Business' support revenues increased for the three and
nine-month periods ended June 28, 1998 from the corresponding periods in
fiscal 1997 due principally to higher radiology support revenues. Gross
margins on support revenues were slightly higher for the most recent quarter
and year-to-date periods due to an increase in the QuadRIS-TM- installed
base, partially offset by fewer support contract renewals from the Company's
legacy client base.
17
<PAGE>
OPERATING AND OTHER EXPENSES:
Summary information showing the Company's operating and other expenses as a
percentage of revenue for the three and nine-month periods are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------------------------------------------------------------
JUNE 28, JUNE 29, JUNE 28, JUNE 29,
1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating costs and expenses:
Marketing and sales 17.6% 15.4% 16.9% 16.1%
Research and development,
net of software capitalization 5.3% 6.6% 6.1% 5.9%
General and administrative 8.2% 6.5% 7.4% 6.6%
Goodwill amortization 0.8% 0.4% 0.8% 0.4%
In-process research and development and
acquisition expenses -- 1.8% -- 0.6%
-------------------------------------------------------------------------------
31.9% 30.7% 31.2% 29.6%
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Interest and other expense, net 2.3% 2.1% 1.7% 2.1%
</TABLE>
Marketing and sales expenses June 28, 1998 increased $2.2 and $5.1 million
from the three and nine-month periods of fiscal 1997 compared to the three
and nine-month periods of fiscal 1998. This increase was primarily a result
of an increase in RTP and HCIS sales representatives.
Research and development expenditures, net of software capitalization,
totaled $3.7 million and $4.3 million in the third quarter of fiscal 1998 and
1997, respectively. Year-to-date research and development expenditures, net
of software capitalization, were $13.0 million and $11.2 million in fiscal
1998 and 1997, respectively. Research and development expenses for the
nine-month period ended June 28, 1998 also increased on a gross basis when
compared to the same period in the prior fiscal year. This increase resulted
primarily from additional investments by the Company to maintain and enhance
its nuclear medicine products and QuadRIS-TM-. These additional investments
were partially offset by the decrease in costs associated with the
discontinuation of LabStat-TM-. See Note 9 of Notes to Condensed
Consolidated Financial Statements.
General and administrative expenses and intangible amortization increased in
dollar volume for the three and nine-month periods ended June 28, 1998.
These increases in general and administrative expenses and amortization of
goodwill resulted principally from the acquisitions made in fiscal 1998. See
Note 13 of Notes to Condensed Consolidated Financial Statements.
In connection with its acquisition of Cortet, Inc. (Cortet) in May 1997, the
Company recognized a non-ordinary charge, pre-tax charge to operations in the
third quarter of fiscal 1997 of $0.5 million for charges related to the
purchase of acquired in-process research development.
Interest and other expense, net, which primarily consists of interest expense
and foreign currency transaction gains and losses, decreased as a percentage
of revenue for the nine-month period ended June 28, 1998 compared to the same
period in fiscal 1997, due primarily to foreign currency gains during the
second quarter of fiscal 1998.
INCOME TAXES:
The effective tax rate as a percentage of pretax income was 39.0% for the
first three and nine months of fiscal 1998 and fiscal 1997.
18
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company believes its available cash resources, generated primarily from
operations and credit lines, will provide adequate funds to finance the
Company's operations in fiscal 1998. If necessary the Company will seek to
increase its credit line to support the Company's future growth.
The Company's ratio of current assets to current liabilities at June 28, 1998,
was 1.5 to one, while working capital for the first nine months of fiscal 1998
increased $6.6 million to $47.4 from $40.8 at the end of fiscal 1997.
The primary uses of cash in 1998 were a $10.5 million increase in accounts
receivable and a $24.5 million increase in inventory. Accounts receivable
increased as a resulted of higher revenues. Additionally, weaker cash
collections in Asian and Latin American markets during the third quarter of
fiscal 1998, contributed to the increase in accounts receivable. Delays in
product installations and implementations due to customer site preparation
and other factors, resulted in an increase in finished goods inventory. These
uses of cash were partially offset by an increase in accounts payable and
accrued liabilities, which resulted from increased purchasing to support the
higher sales volume.
Investing activities used $14.9 million of cash in the first nine months of
fiscal 1998. This activity consisted principally of software development and
the acquisitions of CT Solutions and ONES.
Financing activities provided $20.2 million of cash in the first nine months
of fiscal 1998. This was primarily due to increased borrowings under the
Company's revolving credit facility and common stock issued to employees
under the Company's employee stock purchase and option plans. At June 28,
1998, $27.3 million remained available for borrowing under this revolving
credit facility.
The Company's liquidity is affected by many factors, some based on the normal
ongoing operations of the business and others related to the uncertainties
of the industry and global economies. Although the Company's cash
requirements will fluctuate based on the timing and extent of these factors,
management believes that cash generated from operations, together with the
liquidity provided by existing cash balances and borrowing capability, will
be sufficient to satisfy commitments for capital expenditures and other cash
requirements for the next fiscal year. However, the Company may need to
increase its sources of capital through additional borrowings or the sale of
securities in response to changing business conditions or to pursue new
business opportunities. There can be no assurance that such additional
sources of capital will be available on terms favorable to the Company, if
at all.
BUSINESS CONSIDERATIONS
From time to time, the Company may disclose, through press releases, filings
with the SEC or otherwise, certain matters that constitute forward looking
statements within the meaning of the Federal securities laws. These
statements including the forward looking statements contained in this Form
10-Q/A, particularly this Item 2, are subject to a number of risks and
uncertainties, which could cause actual results to differ materially from
those projected, including without limitation those set forth below. The
Company expressly disclaims any obligation to update any forward looking
statements.
LITIGATION
Commencing in December 1998, a total of eleven class action lawsuits were filed
in federal court by or on behalf of stockholders who purchased Company stock
between January 10, 1996 and December 28, 1998. These actions name as defendants
the Company and certain of its present officers and directors. The complaints
allege various violations of the federal securities laws in connection with
restatement of the Company's financial statements and seek unspecified but
potentially significant damages. The Company intends to contest these actions
vigorously. A stockholder derivative action, purportedly on behalf of the
Company and naming as defendants Company officers and directors was also filed
in state court seeking recovery for the Company based on stock sales by these
defendants during the above time period. The Company is also a defendant in
various legal proceedings incidental to its business.
While it is not possible to determine the ultimate outcome of these actions at
this time, management is of the opinion that any unaccrued liability resulting
from these claims would not have a material adverse effect on the Company's
consolidated financial position, results of operations or cash flow.
19
<PAGE>
GOVERNMENT REGULATION
There has been a trend in recent years, both in the United States and abroad,
toward more stringent regulation and enforcement of requirements applicable
to medical device manufacturers. The continuing trend of more stringent
regulatory oversight in product clearance and enforcement activities has
caused medical device manufacturers to experience longer approval cycles,
more uncertainty, greater risk, and higher expenses. There can be no
assurance that any necessary clearance or approval will be granted the
Company or that FDA review will not involve delays adversely affecting the
Company. In addition, a failure to comply with FDA requirements relating to
medical device design testing, manufacture, packaging, labeling,
distribution, promotion, record keeping, and report of adverse events could
result in enforcement actions including Warning Letters, as well as civil
penalties, injunctions, suspensions or losses of regulatory clearances,
product recalls, seizure or administrative detention of products, operating
restrictions through consent decrees or otherwise, and criminal prosecution.
Following an inspection in 1997, Cortet, Inc., which the Company acquired in
May 1997, received a Warning Letter from the FDA concerning inspectional
observations relating to the adequacies of Cortet's quality assurance system.
Cortet responded to the observations and the Warning Letter and received
correspondence from the FDA's Florida District Office indicating that
Cortet's responses appeared to adequately address the FDA's concerns.
The State of California, under a contract with the FDA, recently completed a
routine inspection of ADAC's facility in Milpitas, California. The state
investigator issued a FDA Form 483 containing observations of objectionable
conditions, including alleged violations of the recently implemented Quality
System Regulations (QSR) applicable to the manufacture of medical devices.
The state investigator also placed a temporary shipment hold on Pinnacle3-TM-
pending the Company satisfactorily responding to the State's concerns
regarding the Company's quality systems. The Company has initiated
appropriate corrective actions, is in the process of responding to the FDA
and the State, and believes it will shortly be able to satisfy their
concerns. There can be no assurance, however, that a Warning Letter or
further enforcement action will not ensue. Failure of the Company to
adequately address the concerns of the FDA and the State of California could
have a material adverse effect on the Company's business and results of
operation.
The Company is also subject to FTC restrictions on advertising and numerous
federal, state and local laws relating to such matters as safe working
conditions, manufacturing practices, environmental protection and disposal of
hazardous substances. Changes in existing requirements, adoption of new
requirements or failure to comply with applicable requirements could have a
material adverse effect on the Company.
COMPETITION
The markets served by the Company are characterized by rapidly evolving
technology, intense competition and pricing pressure. There are a number of
companies that currently offer, or are in the process of developing, products
that compete with products offered by the Company. Some of the Company's
competitors have substantially greater capital, engineering, manufacturing
and other resources than the Company. These competitors could develop
technologies and products that are more effective than those currently used
or marketed by the Company or that could render the Company's products
obsolete or noncompetitive. In fiscal 1997 the introduction by certain of the
Company's nuclear medicine competitors of new products resulted in a decrease
in the Company's market share for that year. In the future, these products
may continue to have an adverse effect on the Company's market share.
DEPENDENCE ON NEW PRODUCTS AND PRODUCT ENHANCEMENTS
ADAC's success is dependent upon the successful development, introduction
and commercialization of new products and the development of enhancements to
existing products. Because the markets in which the Company competes are highly
competitive, the Company must continue to develop and successfully commercialize
innovative new products and product enhancements such as MCD and MCD/AC-TM- in
order to pursue its growth strategy. The development of new products and product
enhancements entails considerable time and expense, including research and
development costs, and the time, expense and uncertainty involved in obtaining
any necessary regulatory clearances. Failure of the Company to develop, market
and sell new products and enhancements effectively in future periods could have
a material adverse effect on the Company's results of operations and financial
condition.
20
<PAGE>
FUTURE OPERATING RESULTS
The Company's future operating results may vary substantially from period to
period. The timing and amount of revenues are subject to a number of factors
that make estimation of revenues and operating results prior to the end of the
quarter very uncertain. The timing of revenues can be affected by delays in
product introductions, shipments and installation scheduling, as well as general
economic and industry conditions. Furthermore, of the orders received by the
Company in any fiscal quarter, a disproportionately large percentage has
typically been received and shipped toward the end of that quarter, which is
typical for the industry. Accordingly, results for a given quarter can be
adversely affected if there is a substantial order shortfall late in that
quarter. In addition, although both the Company's bookings and revenue have
increased in recent periods, the Company's bookings and backlog cannot
necessarily be relied upon as an accurate predictor of future revenues as the
timing of such revenues is dependent upon completion of customer site
preparation and construction, installation scheduling, receipt of applicable
regulatory approvals, customer financing and other factors. Accordingly, there
can be no assurance that orders will mature into revenue.
RISKS RELATED TO ACQUISITIONS
In the past fiscal year, the Company has acquired a number of small
businesses, and anticipates that it may continue to acquire businesses whose
products and services complement the Company's businesses. Acquisitions
involve numerous risks, including, among other things, difficulties in
successfully integrating the businesses (including products and services, as
well as sales and marketing efforts), failure to retain existing customers or
attract new customers to the acquired business operations, failure to retain
key technical and management personnel, coordinating geographically separated
organizations, and diversion of ADAC management attention. These risks, as
well as liabilities of any acquired business (whether known or unknown at the
time of acquisition), could have a material adverse effect on the results of
operations and financial condition of the Company, including adverse
short-term effects on its reported operating results. The Company seeks to
mitigate these risks by taking reserves when appropriate in connection with
these acquisitions. In addition, the Company has in the past and may in the
future issue stock as consideration for acquisitions. Future sales of shares
of the Company's stock issued in such acquisitions could adversely affect or
cause fluctuations in the market price of the Company's Common Stock.
YEAR 2000 COMPLIANCE
The following statements are a "Year 2000 Readiness Disclosure" within the
meaning of the Year 2000 Information and Readiness Disclosure Act. Many
currently installed computer systems and software products are coded to accept
only 2 digit entries in the date code field. Beginning in the Year 2000, these
date code fields will need to accept 4 digit entries to distinguish 21st century
dates from 20th century dates. Systems that do not properly recognize such
information could generate erroneous data or cause a system to fail. As a
result, in one year, computer systems and/or software used by many companies may
need to be upgraded to comply with such Year 2000 requirements. The Company is
utilizing both internal and external resources to identify, correct or
reprogram, and test its internal systems, for Year 2000 compliance. Although
management is continuing to assess the expense associated with internal Year
2000 compliance, the Company does not believe such compliance will have a
material adverse effect on the Company's results of operations or financial
condition.
The Company has completed an assessment and analysis of its internal
information technology systems, software and manufacturing equipment. The
Company has implemented plans to correct its internal Year 2000 issues, and
expects to have its remediation process substantially completed by early
1999. While the Company currently expects that the Year 2000 will not pose
significant internal operational problems, delays in the implementation of
new information systems, or a failure to fully identify all Year 2000
dependencies in the Company's systems, could have a material adverse effect
on the Company's results of operations.
The Company has established a program to assess its products to ensure that
they are Year 2000 compliant. To monitor this program and to inform
customers about the Year 2000 issues with respect to its products, the
Company has created a website at www.adaclabs.com/about/year20001.html. This
website identifies the status of Year 2000 compatibility of its products,
including products that are Year 2000 compliant, products that need free
software updates, products that require hardware upgrades, and products that
cannot be made Year 2000 compliant. This list is periodically updated as
analysis of additional products is completed.
The Company will sell, or provide under warranty or service contracts,
software license upgrades to update the majority of its installed base to
make the products Year 2000 compliant, and anticipates completing development
of such upgrades in
21
<PAGE>
mid-1999. For older equipment which the Company no longer manufactures, the
Company will sell hardware upgrades to its customers which will address the
Year 2000 compliance where possible. The Company is contacting by mail
customers which require computer hardware upgrades, and is also posting
information relating to Year 2000 compliance for its products on the
Company's website as described above.
The Company is gathering information from its suppliers and vendors to
determine the extent to which the Company's capabilities are vulnerable to
failure by those third parties to remedy their own Year 2000 issues. The
Company is currently receiving responses to those inquiries and anticipates
that the analysis of this information will be completed by mid-1999. The
Company will proceed with further analysis or testing of its vendors' systems
as needed. However, there is no guarantee that the systems and products of
other companies on which the Company relies will be timely converted or that
they will not have a material adverse effect on the Company.
The Company is in the process of developing a contingency plan. This plan is
expected to be in place in the first half of mid-1999. The inability of the
Company to develop and implement a contingency plan could result in a
material adverse effect on the Company.
The Company currently estimates that total Year 2000 costs will be
approximately $1.2 million, of which $0.2 million has already been incurred.
These cost estimates do not include any potential costs related to any
customer or other claim. In addition, these cost estimates are based on
current assessments of the ongoing activities described above, and are
subject to changes as the Company continuously monitors these activities.
The Company believes any modifications deemed necessary will be made on a
timely basis and does not believe that the costs of such modifications will
have a material adverse effect on the Company's operating results; however,
the Company's expectations as to the extent and timeliness of any
modifications required in order to achieve Year 2000 compliance and the costs
related thereto are forward-looking statements subject to risks and
uncertainties. Actual results may vary as a result of number of factors,
including those described herein. There can be no assurance that the Company
will be able to successfully modify on a timely basis such products, services
and systems to comply with Year 2000 requirements, which failure could have a
material adverse effect on the Company's operating results.
In addition, the Company is currently seeking to ensure that the software
included in its products and other systems is Year 2000 compliant. Failure
(or perceived failure) of such products to be Year 2000 compliant could
significantly adversely affect sales of such products, which could have a
material adverse effect on the Company's results of operations and financial
condition. In addition, the Company believes that the purchasing patterns of
customers and potential customers may be affected by Year 2000 issues in a
variety of ways. Many potential customers may choose to defer purchasing
Year 2000 compliant products until they believe it is absolutely necessary,
thus resulting in potentially stalled market sales within the industries in
which the Company competes. Conversely, Year 2000 issues may cause other
companies to accelerate purchases, thereby causing an increase in short-term
demand and a consequent decrease in long-term demand for the Company's
products. Additionally, Year 2000 issues could cause a significant number of
companies, including current Company customers, to reevaluate their current
system needs, and as a result consider switching to other systems or
suppliers. Any of the foregoing could result in a material adverse effect on
the Company's business, operating results and financial condition.
HEALTH CARE REFORM; REIMBURSEMENT AND PRICING PRESSURE
There is significant concern today about the availability and rising cost of
healthcare in the United States. Cost containment initiatives, market
pressures and proposed changes in applicable laws and regulations may have a
dramatic effect on pricing or potential demand for medical devices, the
relative costs associated with doing business and the amount of reimbursement
by both government and third party payors, which could have a material
adverse effect on the Company's results of operations.
INTELLECTUAL PROPERTY RIGHTS
The Company's success depends in part on its continued ability to obtain
patents, to preserve its trade secrets and to operate without infringing the
proprietary rights of third parties. There can be no assurance that pending
patent applications will mature into issued patents or that third parties
will not make claims of infringement against the Company's products or
technologies or will not be issued patents that may require payment of
license fees by the Company or prevent the sale of certain products by the
Company.
22
<PAGE>
RELIANCE ON SUPPLIERS
Certain components used by the Company to manufacture its products such as
the sodium iodide crystals used in the Company's nuclear medicine systems are
presently available from only one supplier. The Company also relies on
several significant vendors for hardware and software components for its
healthcare information systems products. The loss of any of these suppliers,
including any single-source supplier, would require obtaining one or more
replacement suppliers as well as potentially requiring a significant level of
hardware and software development to incorporate the new parts into the
Company's products. Although the Company has obtained insurance to protect
against loss due to business interruption from these and other sources, there
can be no assurance that such coverage would be adequate. See Note 1 of
Notes to Consolidated Financial Statements.
PRODUCT LIABILITY
Although the Company maintains product liability insurance coverage in an amount
that it deems sufficient for its business, there can be no assurance that such
coverage will ultimately prove to be adequate or that such coverage will
continue to remain available on acceptable terms, if at all.
VOLATILITY OF STOCK PRICE
The market price of the Company's Common Stock is and is expected to continue
to be subject to significant fluctuations in response to variations in
anticipated or actual operating results, market speculation, announcements of
new products or technology by the Company or its competitors, changes in
earnings estimates by the Company's analysts, trends in the health care
industry in general and other factors, many of which are beyond the control
of the Company. In addition, broad market fluctuations as well as general
economic or political conditions or initiatives, such as health care reform,
may adversely impact the market price of the Common Stock regardless of the
Company's operating results.
23
<PAGE>
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Not applicable.
Item 2. CHANGES IN SECURITIES
Not applicable.
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
Item 5. OTHER INFORMATION
Not applicable.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27 Financial Data Schedule
(b) Form 8-K Reports:
None filed during the fiscal quarter described in this Report
on Form 10-Q.
24
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: February 26, 1999
ADAC Laboratories
-----------------
(Registrant)
BY: /s/ P. Andre Simone
-------------------
P. Andre Simone
Vice President and Chief Financial Officer
25
<PAGE>
EXHIBIT INDEX
<TABLE>
<S> <C>
27 Financial Data Schedule
</TABLE>
26
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ACCOMPANYING CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-27-1998
<PERIOD-START> SEP-29-1997
<PERIOD-END> JUN-28-1998
<CASH> 9,029
<SECURITIES> 0
<RECEIVABLES> 57,765
<ALLOWANCES> (5,091)
<INVENTORY> 71,261
<CURRENT-ASSETS> 136,776
<PP&E> 19,980
<DEPRECIATION> 9,790
<TOTAL-ASSETS> 230,658
<CURRENT-LIABILITIES> 89,387
<BONDS> 0
0
0
<COMMON> 141,684
<OTHER-SE> (17,637)
<TOTAL-LIABILITY-AND-EQUITY> 230,658
<SALES> 151,292
<TOTAL-REVENUES> 211,716
<CGS> 82,136
<TOTAL-COSTS> 136,728
<OTHER-EXPENSES> 66,095
<LOSS-PROVISION> 3,827
<INTEREST-EXPENSE> 3,241
<INCOME-PRETAX> 5,386
<INCOME-TAX> 2,101
<INCOME-CONTINUING> 3,285
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,285
<EPS-PRIMARY> 0.17
<EPS-DILUTED> 0.16
</TABLE>
